Safety Out: Gold, Bonds Fall as Stein Remarks Turn Heads

By Brendan Conway

The Dow and the S&P 500 capped their strongest weekly gains in more than a month on Friday. Come Monday, stocks looked poised to rise early on but have since weakened, and reputed haven asset classes such as gold and bonds are on a downswing. The Japanese yen, which was weak in morning trading, is nearly flat versus the dollar.

There’s a pair of notable monetary-policy stories, with contradictory messages for investors. The first is Jon Hilsenrath’s story in the Wall Street Journal arguing investors missed the real, dovish significance of Janet Yellen’s commentary last week:

In focusing on that, Wall Street might have glossed over news of greater consequence.

The Fed, in its official policy statement, said it planned to keep short-term rates below what it sees as appropriate for a normal economy even after the unemployment rate and inflation revert to typical levels.

In 2016, for example, the Fed projects the jobless rate will reach 5.4%, economic output will be growing at a rate near 3% and inflation will be just below 2%. That level of unemployment would be lower than the average over the past 50 years.

Yet officials see the Fed’s target short-term interest rate at just over 2% at the end of 2016, well below the 4% they consider appropriate for an economy running on all cylinders.

But judging by falling bond prices and rising yields Monday, investors appear to be looking to the other story: the commentary of Fed governor Jeremy Stein.

Federal Reserve Governor Jeremy Stein said monetary policy should be less accommodative when bond markets are overheated even if it raises the risk of higher unemployment.

The remarks suggest financial stability should receive strong consideration as the Fed pursues its two mandates — stable prices and maximum employment — because financial crises can do so much damage to jobs and growth.

“All else being equal, monetary policy should be less accommodative — by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of theunemployment rate from its full-employment level — when estimates of risk premiums in the bond market are abnormally low,” Stein said. He didn’t comment on the current stance of policy.

This is due no doubt to further profit-taking after net long positions in gold were increased for the sixth week running in the week to 18 March. At 121,100 contracts, they are currently at their highest level since the end of November 2012. Meanwhile, the net long positions have probably been reduced in part.

10:25 a.m.: This post was updated to reflect market moves in early Monday trading.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.